Major Highlights from the Economic Survey 2020

The government of Pakistan has launched the latest Economic Survey for 2020.

Growth and Investment Although, provisional GDP growth rate for FY2020 is estimated at negative 0.38 percent, however, macroeconomic stabilization measures undertaken by the government over the past year resulted in a significant reduction in Saving-Investment Gap which was mainly driven by a reduction in the trade deficit and increase in workers’ remittances.

It is also mentionable that fiscal deficit remained contained in the first three-quarters of FY2020. Historically, Private Consumption had significantly contributed to Pakistan’s economic growth. The pattern was likely to continue, however, due to COVID-19, private consumption suffered significantly. In the percentage of GDP, it dropped to 78.5 percent in FY2020 compared to 82.9 percent in FY2019.

Private Investment as a percentage of GDP dropped to 9.98 percent from 10.29 percent in FY2019 while Public Investment (including General Government investment) has shown improvement as it remained 3.8 percent compared to 3.7 percent last year. However, there was a 13.2 percent growth in Public Investment (including General Government investment) during FY2020, while it declined by 21.6 percent last year.

The economy of Pakistan like other economies has a diverse structure with three main sectors -agriculture, industry, and services. The agriculture sector, as mentioned earlier, grew by 2.67 percent. The crops sector has witnessed positive growth of 2.98 percent during FY2020 mainly due to positive growth of 2.90 percent in important crops.

According to the Pakistan Bureau of Statistics, the fourth quarter has been estimated by keeping in view the lockdown situation faced by the industrial sector due to COVID-19. A significant impact has been observed in the manufacturing sector, particularly Large-Scale manufacturing and Small-Scale Manufacturing.

The provisional growth in the industrial sector has been estimated at -2.64 percent mainly due to a negative growth of 8.82 percent in the mining and quarrying sector and a decline of 7.78 percent in the large-scale manufacturing sector.

Due to the lockdown situation in the country, the growth estimates of the Small-Scale Industry for FY2020 are 1.52 percent. Similar to the industrial sector, the services sector of the economy has also witnessed a significant impact of the lockdown situation in the country due to COVID-19, particularly in Wholesale and Retail Trade and Transport Sectors.

The services sector has declined provisionally at 0.59 percent mainly due to a 3.42 percent decline in the Wholesale and Retail Trade sector and a 7.13 percent decline in the Transport, Storage, and Communication sectors. The finance and insurance sector witnessed a slight increase of 0.79 percent.

The Housing Services, General Government Services, and Other private services have contributed positively to 4.02, 3.92, and 5.39 percent respectively. Agriculture The agriculture sector recorded a strong growth of 2.67 percent, considerably higher than 0.58 percent growth achieved last year.

Regarding “Kharif” crops, Rice production increased by 2.9 percent to 7.410 million tonnes and Maize production by 6.0 percent to 7.236 million tonnes while Cotton production declined by 6.9 percent to 9.178 million bales and sugarcane production by 0.4 percent to 66.880 million tonnes. Wheat is the most important crop of “Rabi”, which showed growth of 2.5 percent to reach 24.946 million tonnes.

Other crops showed growth of 4.57 percent mainly due to an increase in the production of pulses, oilseeds, and vegetables. Cotton ginning declined by 4.61 percent due to a decrease in the production of the cotton crop. Thus, the crops sector experienced a remarkable growth of 2.98 percent due to an increase in the growth of important crops by 2.90 percent. Livestock Sector achieved a growth of 2.58 percent. The Fishing sector grew by 0.60 percent, while the Forestry sector increased by 2.29 percent.

During 2019-20, the total availability of water for the Kharif crops 2019 reached 65.2 million MAF showing an increase of 9.4 percent over 59.6 MAF of Kharif 2018. During Rabi season 2019-20, the total water availability reached 29.2 MAF, showing an increase of 17.7 percent over Rabi 2018-19 and 19.8 percent less than the normal availability of 36.4 MAF.

Fertilizer production during FY2020 (July-March) increased by 5.8 percent over the same period last year on the back of an additional supply of gas for fertilizers. The fertilizer import decreased by 20.7 percent. During FY2020 (July-March), there was an uptick in agriculture credit disbursement, the banks have disbursed Rs 912.2 billion higher by 13.3 percent than the disbursement of Rs 804.9 billion made during the same period last year.

Manufacturing

The Large-Scale Manufacturing (LSM) declined by 5.4 percent during July-March FY2020 as compared to 2.34 percent decline during the same period last year. There are a number of factors that contributed to the negative growth of LSM.

Pak rupee depreciated by 3.9 percent during July-March FY2020 which increased the cost structure of industries in general and for those relying on imported raw materials in particular.

Furthermore, the policy rate was kept high to contain inflation which discouraged investment. Subdued demand further hampered the overall production and performance of the industry.

Certain sector-specific issues also contributed to the decline in LSM. The automobile sector alone accounted for a major portion of contraction in LSM. Its prices witnessed multiple upward revisions due to PKR depreciation which held the potential buyers from making booking and purchases.

An upward adjustment in electricity prices dented domestic steel producers’ margins. The Mining and Quarrying sector showed a negative growth of 8.82 percent during FY2020 as against 3.19 percent decline last year.

This sector is lagging behind despite huge potential due to interconnected and cross-cutting issues like poor regulatory framework, insufficient infrastructure at mines sites, outdated technology installed, semi-skilled labor, low financial support, and lack of marketing.

Fiscal Development

The fiscal outcomes remained strong during the first nine months of the current fiscal year after a sharp deterioration in FY2019. The government’s stringent fiscal strategy to improve the revenues along with expenditure rationalization helped in improving all fiscal indicators. Particularly, the imbalances on the fiscal side reverted to the path of fiscal discipline and fiscal consolidation.

The fiscal deficit has substantially reduced to 4.0 percent of GDP during July-March, FY2020 against 5.1 percent of GDP in the comparable period last year. Similarly, a remarkable turnaround is visible in primary balance, which posted a surplus of Rs. 194 billion during July-March, FY2020 against the deficit of Rs. 463 billion.

Overall, the improvement in the fiscal account is largely attributed to a higher provincial surplus and a sharp rise in non-tax revenues. FBR tax collection grew by 10.8 percent to Rs 3,300.6 billion during July-April, FY2020 against Rs. 2,980.0 billion in the comparable period last year.

Various policy measures such as charging sales tax on more items at a retail price under 3rd Schedule, reinstatement of taxes on telecom services, an upward revision of tax rates on various salary slabs, an upward revision in the federal excise duty (FED) rates and end of preferential treatment for certain sectors provided the impetus to tax collection were taken during FY 2020.

Non-tax revenues grew sharply during July-March, FY2020 on the back of SBP profit and rise in receipt of telecom licenses renewal fees. It stood at Rs 1,095.6 billion during JulyMarch, FY2020 against Rs. 421.6 billion in the same period of FY2019.

Thus, total revenues grew by 30.9 percent during July-March, FY2020 against 0.04 percent growth in the comparable period of FY2019. Total expenditures grew by 15.8 percent during July-March, FY2020 over the same period last year.

Within the total, current expenditure posted 16.9 percent growth in nine months of current fiscal on account of higher mark-up payments, grants for social spending, and expenditures on social protection.

Similarly, PSDP spending witnessed a significant rise both at federal and provincial levels. Overall PSDP expenditures grew by 24.9 percent during July-March, FY2020 over the previous year.

Fiscal position till March 2020 indicated improved fiscal performance, however, the COVID-19 pandemic has brought significant challenges for the economy; in particular, fiscal accounts are expected to come under significant pressure.

At present, the government is increasing the expenditures on public health and strengthening social safety net programs, along with introducing various other measures to lessen the impact of the COVID-19 on the economy. Similarly, achieving revenue targets of both tax and non-tax segments would be challenging due to disruption in economic activity.

The short term economic impact of COVID-19 is expected to be significant creating large fiscal and external financing needs. Money and Credit In order to absorb the inflationary pressure and to contain an overheated economy through domestic demand, SBP increased the policy rate by 100 bps to 13.25 percent at the beginning of the fiscal year 2020.

However, SBP has reversed its monetary policy stance due to an improved outlook for inflation on the back of decreasing domestic food prices, a sharp fall in global oil prices, and a decline in demand pressures due to COVID-19. It reduced the policy rate by cumulative 525 bps to 8 percent in four consecutive decisions between March 17th and May 15th.

In addition, SBP has introduced a number of measures and some concessional refinance schemes to address both the demand and supply-side conditions for businesses such as Temporary Economic Refinance Facility, Refinance Facility for Combating COVID-19 and Refinance Scheme for Payment of Wages and Salaries to the Workers and Employees of Business Concerns.

These measures are aimed at facilitating the businesses to remain afloat during the crisis times. Broad money has increased to Rs 1,481.3 billion during 01 Jul-24 Apr, FY2020 showing a sharp expansion in the Net Foreign Assets (NFA) of the banking system which reached Rs. 893.7 billion. Credit to private sector contained to Rs 304.7 billion during 01 Jul-24 Apr, FY2020 as compared to the expansion of Rs 581 billion in the corresponding period due to slowdown in economic activities.

Under the IMF’s Extended Fund Facility (EFF) program, the government had committed not to borrow from the SBP to finance its deficit and most of the demand has been met by scheduled banks. For budgetary support, the government has borrowed Rs 1,023.91 billion from 01 Jul-24 Apr, FY2020 against the borrowing of Rs 990.87 billion last year. The government has retired Rs 736.47 billion to SBP against the borrowing of Rs 3,204.72 billion last year.

On the contrary, the Government has borrowed Rs 1,760.38 billion from scheduled banks against the retirement of Rs 2,213.85 billion last year.

IT & Telecom

As per the Ministry of IT & Telecom, 07 million SIM Cards and 10,000 Banking Cards are being imported in Pakistan every month. There has been a consistent growth in IT & IT enabled Services (ITeS) remittances over the last 5 years, with a compound annual growth rate of 19.5 percent, the highest growth rate in comparison with all other industries, and the highest in the region.

Pakistan’s IT&ITeS exports have crossed $4.1 billion during FY2019 with export remittances nearing $1 billion. Micro enterprises, independent consultants, and freelancers have contributed an estimated $500 million in IT&ITeS exports, whereas annual domestic revenue exceeds $1billion. IT&ITeS export remittances have surged to US$ 550.503 million at a growth rate of 24.71 percent during July-December 2019, in comparison to US$441.435 million during the same period last year.

From July 2015 to Dec-2019, the telecom sector has attracted over US$ 1.5 billion FDI Inflow, whereas a total of US$ 8.5 billion has been invested by telecom players in Pakistan since 2002. During the first two quarters of the FY2020, the telecom sector contributed Rs 142 billion to the national exchequer.

Annual revenues from the telecom sector have reached an estimated Rs 551.9 billion during FY2019, up from Rs 440 billion last year, registering an annual growth of 12.9 percent. Revenues from the telecom sector have reached an estimated Rs 132.3 billion in the first quarter of FY2020. Pakistan Electronic Media Regulatory Authority (PEMRA) has issued 254 Licenses for FM Radio and 4,062 Cable TV Licenses. PEMRA collected advance tax from license issuances and their renewal and has deposited over Rs 1.0 billion in national exchequer.

Inflation

The inflation rate started easing out due to government policies after January and for the period July-April FY2020 recorded at 11.2 percent against 6.5 percent during the same period last year. The other inflationary indicators like Sensitive Price Indicator (SPI) recorded at 14.3 percent against 4.2 percent over the same period last year.

Wholesale Price Index (WPI) recorded at 12.2 percent during Jul-April FY2020 compared to 16.2 percent the same period last year. The government is making all out efforts to ensure smooth supply of essential items and is also committed to taking strict actions against anti-competitive practices.

Economic Stimulus Package, Ehsas Emergency Relief Programme, Subsidies to USC and reduction in petroleum prices, etc., will provide multidimensional positive impacts to all segments of society especially poor families. All these measures helped in contracting the CPI to a single digit which fell to 8.5 percent in April 2020. This was the third successive month showing a decline in inflation, whereas it dropped more than 6 percent in the last three months. Trade and Payments Exports during July-April, 2019-20 remained $ 19.7 billion compared to $ 20.1 billion during July-March, 2018-19, posting a decline of 2.4 percent.

REER

A sharp decline in REER due to market-based exchange rate and the government’s initiative to provide cheaper electricity to the textile sector has enhanced the competitiveness of Pakistani products in the global market. The total imports during July-April FY2020 declined to $ 36.1 billion as compared to $ 40.3 billion the same periods last year, thus registered a decline of 16.9 percent.

Remittances and Current Account Deficit

During Jul-April FY2020, remittances increased to $ 18.8 billion as compared to $ 17.8 billion during the same period last year, with a growth of 5.5 percent. During July-March FY2020, the current account deficit (CAD) reduced by 73.1 percent to US$ 2.8 billion (1.1 percent of GDP) against US$ 10.3 billion last year (3.7 percent of GDP).

The significant reduction in CAD reflected mainly the impact of macroeconomic stabilization measures taken by the government. Pakistan’s total liquid foreign exchange reserves increased to US$ 17.1 billion by the end of March 2020, up by US$ 2.6 billion over end-June 2019.

Foreign Exchange reserves

The improvement in the Foreign Exchange reserves led to a 3.6 percent appreciation of Pak rupee against the US dollar during Jul-February FY2020. The COVID-19 pandemic has generated both demand and supply shocks across the global economy and has posed significant challenges for exports to increase further in the coming months. Pakistan, as a net oil importer, would benefit from the decline in global oil prices in terms of reduced import bill and contraction in CAD. Despite the adverse impact of a pandemic on the economy, the overall external account liquidity has actually improved due to a decline in oil and other international commodity prices.

Debt

Public Debt Pakistan’s strategy to reduce its debt burden to a sustainable level includes a commitment to run primary surpluses, maintain low and stable inflation, promote measures that support higher long-term economic growth and follow an exchange rate regime based on economic fundamentals.

Total public debt was recorded at Rs 35,207 billion at end-March 2020 compared with Rs 32,708 billion at the end of June 2019, registering an increase of Rs 2,499 billion during the first nine months of the current fiscal year while Federal Government borrowing for the financing of its deficit was Rs 2,080 billion.

This differential is mainly attributable to the depreciation of Pak Rupee, an increase in cash balances of the Federal Government and the difference between face value (which is used for the recording of debt) and the realized value (which is recorded as a budgetary receipt) of PIBs issued during the period. The public debt portfolio witnessed various positive developments during the ongoing fiscal year.

Most of the net domestic debt raised was through medium-to-long-term government securities (Pakistan Investment Bonds) and National Saving Schemes. The cost of borrowing through long term government bonds declined. No new borrowing was made from SBP during the ongoing fiscal year.

To diversify investor base in government securities and capitalize liquidity available with Islamic Financial Institutions, the government has started issuance of 5-Year Floating Rate Sukuk. All of the net external debt raised during the first nine months of the current fiscal year was from multilateral and bilateral sources on concessional terms. The domestic debt was recorded at Rs 22,478 billion at the end of March 2020.

Domestic borrowing operations remained quite successful during the ongoing fiscal year despite challenging macroeconomic situations. External public debt stock reached US$ 76.5 billion (Rs 12,729 billion), witnessing an increase of US$ 3.0 billion during the first nine months of the current fiscal year. Interest expense is expected to remain significantly less than the budgeted amount in 2019-20 owing to the re-profiling of short-term debt into long-term debt and a sharp decline in the cost of borrowing in longer tenor.

Over the medium term, government objective is to reduce its “Gross Financing Needs (GFN)” through various measures mainly including

Better cash flow management through a treasury single account;
Lengthening of maturities in the domestic market keeping in view cost and risks trade-off;
Developing regular Islamic based lending program
Availing maximum available concessional external financing from bilateral and multilateral development partners to benefit from concessional terms and conditions.

The government also aims to bring and maintain its Debt-to-GDP and Debt Service-to-Revenue ratios to sustainable levels through a combination of greater revenue mobilization, rationalization of current expenditure, and efficient/productive utilization of debt.

COVID-19 pandemic

The way forward The Coronavirus outbreak is a human tragedy, affecting hundreds of thousands of people globally. It is also having a growing adverse impact on the global economy including Pakistan.

In the current situation the government has a dual challenge; to contain the spread of the COVID-19 pandemic and to mitigate the socio-economic losses to protect the most vulnerable.

This is the first time in a hundred years that the world is facing a rapidly spreading fatal virus for which there is no authentic prevention /treatment to overcome the pandemic. A cure is the only sure way to move forward, but “until such medical interventions become available, no country is safe from the pandemic”.

Global value chains have been disrupted. Stock and commodity prices are falling around the world. Long term bond yields are heading south in fear of global recession.

Airlines and tourism businesses are fearing massive losses. Most of these businesses are SMEs, there will be loss of employment and small business owners will face reduced liquidity. Many businesses face problems in managing cash flows.

Strategic interventions in specific industries are being undertaken to safeguard the common man and accelerate economic activities. Under the current crisis top priority of the government is to protect the vulnerable segments of the society.

Therefore, the prime focus areas of the government are health, social safety, industry, farming, trade, etc. The government is constantly monitoring the COVID-19 situation in the country and accordingly taking all out measures to mitigate its adverse effects on the economy and general public.